Business Formation and Partnership Setup in the Philippines

Business Formation and Partnership Setup in the Philippines: A Comprehensive Guide

Disclaimer: This article is for general informational purposes only and does not constitute legal advice. For specific concerns, it is best to consult a qualified legal professional.

1. Introduction

Starting a business in the Philippines involves navigating multiple regulatory frameworks, which can differ according to the type of business structure you choose. Although there are many forms of business organizations (sole proprietorship, partnership, corporation, one-person corporation, and more), this article focuses primarily on business formation and the setup of partnerships under Philippine laws. Key legal provisions concerning partnerships are primarily found in the Civil Code of the Philippines, while corporations are mainly governed by the Revised Corporation Code of the Philippines (Republic Act No. 11232).

Understanding the nuances of business formation and partnership requirements ensures that entrepreneurs can select the structure most suited to their needs and remain compliant with Philippine laws.

2. Overview of Business Structures in the Philippines

2.1 Sole Proprietorship

  • Definition: A sole proprietorship is the simplest form of business, owned by one individual who has full control and responsibility for the business liabilities.
  • Governing Body: Primarily regulated by the Department of Trade and Industry (DTI).
  • Characteristics:
    • No legal distinction between the owner and the business (unlimited liability).
    • Easy to set up with minimal requirements.
    • Ownership cannot be transferred.

2.2 Partnership

  • Definition: A partnership is a contract between two or more persons who bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves (Article 1767, Civil Code of the Philippines).
  • Governing Laws: Regulated by the Civil Code of the Philippines (Articles 1767–1867).
  • Characteristics:
    • Separate juridical personality distinct from its partners (once registered with the SEC, if required).
    • Partners can share in profits and losses based on their agreement.
    • Can be classified as a general partnership or limited partnership (depending on liability and involvement in management).

2.3 Corporation

  • Definition: A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence.
  • Governing Law: Revised Corporation Code of the Philippines (R.A. 11232).
  • Characteristics:
    • Limited liability for shareholders.
    • Separate legal personality.
    • May be set up as a One Person Corporation (OPC) or a stock corporation with at least two incorporators.
    • More stringent compliance requirements (e.g., annual stockholders’ meetings, annual financial statements).

2.4 Cooperative

  • Definition: A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end.
  • Governing Law: Philippine Cooperative Code of 2008 (R.A. 9520).
  • Characteristics:
    • Operates on the principle of cooperation and mutual assistance.
    • Owned and democratically controlled by members.

3. Key Considerations Before Forming a Partnership

  1. Objective of the Business: The nature and scope of the business might influence whether a partnership is the best structure. Some types of ventures might be easier or more efficiently operated as a corporation or sole proprietorship.
  2. Capital Requirements: Partnerships generally require each partner to contribute money, property, or industry. The amount and form of contribution are set in the partnership agreement.
  3. Liability: In a general partnership, all partners have unlimited liability for partnership debts. In a limited partnership, there is at least one general partner with unlimited liability and one or more limited partners whose liability extends only to their contribution.
  4. Management and Decision-Making: Determine how management decisions will be made. Typically, in a partnership, partners have equal rights in the management unless otherwise agreed upon.
  5. Profit-Sharing Arrangements: The Civil Code presumes that partners share profits and losses equally unless there is a different stipulation in the partnership agreement.
  6. Term of the Partnership: Partnerships may be constituted for a particular undertaking or for a fixed period. If not specified, it can be considered a partnership at will.

4. Step-by-Step Guide to Setting Up a Partnership

4.1 Drafting the Partnership Agreement

  1. Name of the Partnership: Decide on a name that must be consistent with the partnership’s nature and must not be identical or confusingly similar to any existing business. Some partnerships include surnames of the partners; however, under certain circumstances, the SEC may not allow names that are too generic or misleading.
  2. Principal Place of Business: Indicate the official business address.
  3. Purpose or Business Activity: Clearly define the business activities and scope of operations.
  4. Contributions of Each Partner: Specify the type (money, property, or industry), the amount or value, and how these contributions translate into the percentage of ownership or shares in profit/loss.
  5. Profit and Loss Distribution: Determine how profits and losses will be shared. If not indicated, the law prescribes equal sharing.
  6. Management and Authority: Outline who among the partners will handle day-to-day operations and decision-making.
  7. Term or Duration: If the partnership is for a specific period or purpose, it should be stated clearly.
  8. Dissolution and Liquidation: Include clauses for how the partnership can be dissolved and how assets and liabilities will be liquidated and distributed.

4.2 Verifying the Proposed Name

  • Conduct an online name search with the Securities and Exchange Commission (SEC) to ensure the proposed partnership name is available and not misleading.

4.3 Preparing Documentary Requirements

Common documents required by the SEC include:

  1. Articles of Partnership (duly signed by all partners and notarized).
  2. Name Verification Slip (proof of approved name reservation).
  3. Bank Certificate of Deposit (if the partnership is required to maintain certain capital).
  4. Proof of Inward Remittance (if foreign partners are involved and contributing capital).
  5. Special Power of Attorney (SPA) or Board Resolution (if filing through a representative).

4.4 SEC Registration Process

  1. Online Submission: The SEC has online facilities (e.g., the SEC Company Registration System) for name reservation and initial document submission.
  2. Review of Documents: The SEC reviews the Articles of Partnership and other submissions for compliance.
  3. Payment of Filing Fees: File the required fees with the SEC, typically calculated based on the partnership’s capital.
  4. Issuance of Certificate of Registration: Once the application is approved, the SEC will issue a Certificate of Registration, formally recognizing the partnership as a juridical entity.

4.5 Post-Registration Compliance

  1. Obtain Barangay Clearance: Secure from the barangay where the principal place of business is located.
  2. Obtain Mayor’s/Business Permit: Apply at the local government unit (City Hall or Municipal Hall).
  3. Register with the Bureau of Internal Revenue (BIR):
    • Obtain a Tax Identification Number (TIN) for the partnership.
    • Register books of account.
    • Print and register official receipts or invoices.
  4. Register with Other Agencies (as needed):
    • Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG) for employee benefits.
    • Department of Labor and Employment (DOLE), if employing a certain number of employees.
  5. Ongoing Compliance: Partnerships are required to file tax returns, maintain books of account, and submit certain reports to the SEC (for partnerships with more than certain capitalization thresholds).

5. Types of Partnerships under Philippine Law

5.1 General Partnership

  • Definition: All partners share unlimited liability for the debts and obligations of the partnership.
  • Management: Each partner typically has the right to participate in the management.
  • Liability: Partners are liable pro rata to partnership debts with their personal properties if partnership assets are insufficient.

5.2 Limited Partnership

  • Definition: Composed of at least one general partner with unlimited liability and one or more limited partners whose liability is limited to their capital contributions.
  • Management: General partners oversee business operations; limited partners cannot participate in management without risking loss of their limited liability status.
  • Liability: Limited partners are shielded from personal liability beyond their contributions, provided they do not become involved in day-to-day management.

6. Foreign Participation in Philippine Partnerships

Foreign nationals may invest in or form partnerships subject to certain restrictions:

  1. Negative List: Under the Foreign Investments Act (R.A. 7042, as amended by R.A. 11647) and related laws, some sectors have restrictions or prohibitions on foreign ownership (e.g., mass media, retail trade below certain thresholds, practice of certain professions).
  2. Minimum Capital Requirements: Depending on the nature of the business and the level of foreign equity, there may be minimum paid-in capital requirements (e.g., US$200,000 or US$100,000 for certain export enterprises).
  3. Visa and Work Permits: Foreign partners who intend to work in the Philippines must obtain the required visa and alien employment permit from the Bureau of Immigration (BI) and the Department of Labor and Employment (DOLE).

7. Taxation of Partnerships

  1. Corporate Tax Rates: Under Philippine tax laws, a general professional partnership (GPP) is taxed differently from other partnerships.
    • General Professional Partnership (GPP): Formed by persons for the exercise of a common profession (e.g., lawyers, accountants). The GPP itself is not subject to income tax; the individual partners are taxed on their respective shares of profits.
    • Other Partnerships: Taxed similarly to corporations (i.e., they are subject to corporate income tax).
  2. Value-Added Tax (VAT) or Percentage Tax: Depending on gross annual sales/receipts and the nature of the business, the partnership may be subject to VAT or percentage tax.
  3. Withholding Taxes: The partnership is responsible for withholding and remitting taxes on compensation for employees and on certain payments to suppliers or service providers.
  4. Local Business Taxes: Local government units may impose business taxes, typically assessed based on gross receipts.

8. Dissolution and Winding Up

A partnership can be dissolved for various reasons, including:

  • Expiration of Term: If the partnership is for a fixed period or a particular undertaking.
  • Mutual Agreement: Partners may agree to dissolve the partnership.
  • Death, Withdrawal, or Incapacity of a Partner: If stipulated in the agreement or if no provision is made, the partnership dissolves by operation of law.
  • Court Decree: In certain circumstances (fraud, breach of trust, etc.).

Once dissolved, the partnership undergoes winding up, which involves settling debts, liquidating assets, and distributing remaining assets (if any) among partners in proportion to their interests or as specified in the partnership agreement.

9. Common Pitfalls and Best Practices

  1. Vague Agreements: Ensure the Articles of Partnership clearly define roles, contributions, distributions, and management powers to avoid disputes.
  2. Failure to Register: While the partnership may exist from the time of the contractual agreement among partners, registration with the SEC confers legal personality and is usually required for most business transactions.
  3. Compliance Gaps: Regularly file reports and tax returns, and renew business permits on time to avoid penalties.
  4. Insufficient Capital: Carefully evaluate capital contributions, especially for limited partnerships, to ensure the business can operate effectively.
  5. Partner Disputes: Have clear dispute resolution mechanisms, such as mediation or arbitration clauses, to prevent protracted legal battles.

10. Conclusion

Forming a business in the Philippines—particularly setting up a partnership—can be a rewarding endeavor if navigated properly. It offers the advantages of shared management, resources, and expertise. However, entrepreneurs must comply with legal requirements, particularly those outlined in the Civil Code and SEC regulations, to ensure the partnership gains juridical personality and operates within the law.

Ultimately, selecting the right business structure depends on the nature of the venture, desired level of liability protection, and long-term growth plans. While a partnership might be appropriate for certain professional ventures or businesses with a small number of active co-founders, other structures (like the One Person Corporation or a regular corporation) may better serve larger-scale enterprises or those that wish to limit personal liability.

Before proceeding with any business formation, it is highly advisable to seek professional guidance from lawyers and accountants. Compliance, clarity in drafting the partnership agreement, and proper registration will help maintain smooth operations and minimize legal risks in the Philippine business landscape.

References:

  1. Civil Code of the Philippines (Republic Act No. 386), Articles 1767–1867 (Partnership).
  2. Revised Corporation Code of the Philippines (Republic Act No. 11232).
  3. Foreign Investments Act (Republic Act No. 7042, as amended by R.A. 11647).
  4. Philippine Cooperative Code of 2008 (Republic Act No. 9520).
  5. Bureau of Internal Revenue (BIR) regulations and issuances.
  6. Securities and Exchange Commission (SEC) memoranda and circulars.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

Privacy Policy

Terms of Use

Lawyer Login

 
 
Privacy Policy         Terms of Use         Lawyer Login